Perspective

ANYONE AT ALL CLOSE TO the securitization scene agrees on at least one thing: The referenda in California and Massachusetts seeking to roll back restructuring have cast such a pall over the bond issues put out late last year by the California electric utilities to finance their stranded costs that any new issuer hoping for the same 'AAA' rating may as well get prepared to sacrifice his or her firstborn to the rating agencies.

One major firm called a press conference to confirm its ratings, but the call betrayed more worry than confidence, for those bonds had already diverged substantially from where they had first settled in trading after the offering was concluded. Everyone who bought the bonds and then sold within the first six months came out well ahead; but all that's changed now. The California bonds may have been oversubscribed by 10 or 15 times, yet the two ballot initiatives have dampened that initial enthusiasm.

Of course, bond counsel and the agencies continue to provide assurances that no harm will come even if the voters do adopt the proposals. They reason that the Constitution of the United States and the Constitution of the State of California will keep the bondholders whole. Yet the question on Wall Street, for buyers at either above or below par, is the question the whole industry is struggling with right now: Is the right measurement par (book) value or market value? What does it mean, to be made or kept whole? As Henny Youngman used to say: "Compared to what?"

No one has a clear answer, but the overwhelming weight of the law lies on the side of fair treatment for holders of this type of instrument. There is probably a lot of money being left on the table on Wall Street while traders stand paralyzed on both sides of the issue. In this way stranded costs and securitization are now linked on the market side, just as they were linked on the regulatory side when the state authorized these securities.

The ratemaking process, which forms the basis for any securitization financing in this industry, still remains problematic. Yes, Wall Street analysts have tracked ratemaking in gross or macro terms for years. Very rough and frequently overlapping categories of coverage ratios defined the quality of credit in the industry. However, securitization emerged, they never saw any need to link the technicalities and mechanics of ratemaking to a particular level of creditworthiness assigned by a rating agency to any entity or issue.

But now, if they cannot understand and assure the linkage between the ratemaking process and the payment mechanisms for the bonds, reaching any real level of comfort in this area is impossible for these analysts, given the many trapdoors that exist in utility accounting and ratemaking as it has evolved and become politicized.

At the end of the day, the utility commission still determines the recovery and the mechanism of securitization, whether it is achieved by a legislative or administrative process. Yet, the difference in nomenclature is telling. "Legislative" securitization is that done by

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